Lecture : 1

Economics:
Objectives of Economics
Flow in an Economy
Micro and Macro Economics
Engineering Economics:
Scope , Principles and Engineering economic decisions
Managerial Economics:
Managerial Economics,
Functions of Manager and Decision Making

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Economics

People are concerned with improving their standard of

living; they are worried about inflation and
unemployment; they may be distributed by the poverty
of the less fortunate. People are confronted with
difficult personal choice: when to by a home, whether to
change jobs, whether to attend college. People are often
confused by the economic claims and counterclaims of
opposing political parties.
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Economics
People can find help in dealing with these questions and
concerns in the study of Economics.

The word “Economics” comes from the word

“Household Management”. Adam Smith wrote a book
name “ An Enquiry into the Nature and Causes of
Wealth of Nations” in 1776.

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Economics

He separated Economics as a separate branch from the

word household management. So, Adam Smith is a
Father of Economics.

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Definition of Economics
Definition : Prof. Lionel Robbins defines economics
as “Science which studies human behavior as a
relationship between ends and scarce means which have
alternative uses”.

Alfred Marshall defined economics as “A study of

mankind in the ordinary business life.”
It examines that part of individual and social actions
which is most closely connected with the attainment and
with the use of material requisites' of well being.

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Definition of Economics

Simple Definition :

A study of how limited resources are used to satisfy

unlimited human wants. Finally,

Economics is the branch of social science which

concerned with the proper uses and allocation of limited
or scarce resources for the achievement and
maintenance of growth and development with stability.

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Continued..

Economics can generally be broken down into :

1)Microeconomics:-which focuses on individual consumers
and businesses, like a household, a firm or an industry. And

2) Macroeconomics:-which concentrates on the behavior of

the aggregate economy. Such as:
• Total Employment
• National Product
• National Income
• General Price-Levels etc.

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OBJECTIVES OF ECONOMICS

• A high level of employment

• Price stability

• Efficiency

• An equitable distribution of income

• Growth

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FLOW IN AN ECONOMY

The flow of goods, services, resources and money

payments results in a simple economy

Households and business firms are the two major

entities in a simple economy.

Business organizations use various economic

resources such as land, labour and capital which are
provided by households to produce consumer goods
and services which will be used by them.
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Business firms make payment to the money to the
households for receiving various resources.

The households in turn make payments to the

business organizations.

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Engineering economics,

Engineering economics is a subcategory of economics

for application to engineering projects. It is defined as
“A set of principles , concepts, techniques and methods
by which alternatives within a project can be compared
and evaluated for the best monetary return”.

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Engineering economics

It is the application of economic techniques to the

evaluation of design and engineering substitutes. The
prominent role of engineering economics is to assess the
appropriateness of a given project also with estimate its
value and justify it from an engineering position.
Engineering Economics is the study of how to make
economic decisions in engineering projects.

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SCOPE OF ENGINEERING ECONOMICS

• Engineering economics plays a very major role in all

engineering decisions.

• It is concerned with the monetary consequences,

financial analysis of the projects, products and processes
that engineers design.

• Engineering economics helps an engineer to assess and

compare the overall cost of available alternatives for
engineering projects.
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Continued..
• According to the analysis an engineer can take decision
from the alternative which is more economic.

• Engineering economics concepts are used in the fields

for improving productivity, reducing human efforts,
controlling and reducing cost.

• Engineering economics helps to understand the market

conditions general economic environment in which the
firm is working.

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Continued..

• It helps in allocating the resources.

• Engineering economics helps to deal with the

identification of economic choices, and is concerned
with the decision making of engineering problems of
economic nature.

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Principles of an Engineering Economy

1. Develop the Alternatives:

The principle of developing alternatives refers to the
process of identifying and valuating different options
or courses of action in order to choose the most
suitable one. This principle is often applied in
engineering economics, where it involves identifying
and evaluating the costs and benefits of different
alternatives in order to choose the most cost-effective
option.

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To develop alternatives, engineers may use a variety
of tools and techniques, such as brainstorming,
SWOT analysis, and cost-benefit analysis. They may
also involve other stakeholders, such as clients, users,
and subject matter experts, in the process to ensure
that all relevant perspectives are considered.
•SWOT stands for Strengths, Weaknesses, Opportunities, and Threats,
and so a SWOT analysis is a technique for assessing these four
aspects of your business.

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2. Focus on Differences:

The principle of focusing on the difference relates to the

concept that while comparing options, it is vital to
consider their differences rather than their similarities.
This theory is frequently used in engineering economics
to compare the costs and advantages of many alternatives
in order to select the most cost-effective solution.

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Focusing on the difference allows engineers to find
the important elements that distinguish the options
and make informed conclusions about which one is
best. It is a key decision-making phase because it
allows engineers to evaluate solutions based on the
exact criteria that are most relevant to their needs and
goals.

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3. Use a consistent view point:

The principle of using a consistent viewpoint refers

to the idea that when evaluating different
alternatives, it is important to use the same
perspective or frame of reference in order to make
fair and accurate comparisons. This principle is
often applied in engineering economics,

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where it involves comparing the costs and benefits of different
alternatives in order to choose the most cost-effective option.

Using a consistent point of view allows engineers to compare

alternatives on a level playing field and avoid bias toward one
choice over another. It is a critical phase in the decision-
making process because it enables engineers to make informed
and unbiased conclusions about which alternative is best.

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4.Use of common unit of measure :
The principle of using a common unit of measurement
refers to the idea that when evaluating different
alternatives, it is important to use a consistent unit of
measurement in order to make fair and accurate
comparisons. This principle is often applied in
engineering economics, where it involves comparing the
costs and benefits of different alternatives in order to
choose the most cost-effective option
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5. Consider all Relevant Criteria:

The principle of considering all relevant criteria refers to the

idea that when evaluating different alternatives, it is important
to consider all factors that are relevant to the decision in order
to make an informed and well-rounded choice. This principle
is often applied in engineering economics, where it involves
comparing the costs and benefits of different alternatives in
order to choose the most cost-effective option.

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6. Make Uncertainty Explicit:
The principle of making uncertainty explicit relates to the
idea that it is critical to acknowledge and account for any
uncertainty or uncertainty in the data or assumptions used
in the analysis while evaluating different alternatives.
This theory is frequently used in engineering economics
to compare the costs and advantages of many alternatives
in order to select the most cost-effective solution.

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7. Revisit your decisions : The principle of revisiting your
decision refers to the idea that it is important to periodically
review and assess your decisions in order to ensure that they
are still relevant and appropriate given any changes in the
circumstances. This principle is often applied in engineering
economics, where it involves reviewing and assessing the
costs and benefits of different alternatives in order to ensure
that the chosen option is still the most cost-effective.

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Engineering economic decisions

The five main types of engineering economic decisions

are
•(1) Selection of equipment or process
•(2) Replacement of equipment
•(3) New product or product expansion
•(4) Reduction of cost
•(5) Improvement in quality or service.

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Managerial Economics:

Managerial Economics is a branch of Economics

which is applied in Decision Making. It is a special
branch of Economics bridging the gap between
Abstract Theory and Managerial Practices. It stress is
on the use of the tools of Economic Analysis in
clarifying problems, in organizing and evaluating
information and comparing alternative courses of
action.
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While Managerial Economics is sometimes known as
Business Economics, it encompasses methods and a
point of view applicable both in Business and in other
Institutions faced with optimization in decision
making.

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Continued.....

According to Spencer and Seigelman “Business

Economics (Managerial Economics) is the integration
of economic theory with business practice for the
purpose of facilitating decision making and forward
planning by management.”

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Economics is sometimes defined as the study of the
allocation of scarce social resources among unlimited
ends. It follows that Managerial Economics is the study
of allocation of the resources available to a firm or
other unit of management among the activities of that
unit. Such a definition implies that managerial
Economics is concerned with choice – with the
selection among alternatives.
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Levels of Management

• Top-level: President, Executive vice president

• Middle-level: Chief engineer, Division head, etc.

• First-line: Foreman, Supervisor, Section chief

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Functions of Manager
There are four functions of a manager ;
PLANNING or decision upon business goals and the
methods to achieve them;
ORGANIZING or determining the best allocation of
people and resources;
DIRECTING or motivating, instructing, and supervising
workers assigned to the activity;
CONTROLING or analyzing metrics during business
activities to ensure completion of tasks and identify areas
for improvement.

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Managerial Economics and Decision Making

• A decision is simply a selection from two or more

courses of action.

• The Essence of an economics is the solution to an

economic problem.

• When two or more alternative courses of economic

action are available there is the problem of choice-
the economic problem.

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